Monday, May 28, 2012

Global addiction to government stimulus

It is quite sad to see just how dependent the global economy and markets have become on government stimulus and bailouts. Here are just a couple of examples:

1. Asia's markets and commodities are up tonight (after a major and prolonged correction) on speculation of China's new stimulus:

Bloomberg: - Asia stocks reversed losses and oil gained on speculation China will take steps to boost growth in the world’s second-largest economy. The euro traded near a 22- month low as Europe’s banks seek more financial support.
...
“There are expectations China will introduce more stimulus to boost the economy and there’s optimism the economy will recover in the second half,” said Mao Sheng, an analyst for Huaxi Securities Co. in Chengdu. “External factors such as Europe woes are still dragging on the market.”

2. As discussed earlier today, Spanish banks are now fully expecting a bailout:

Bloomberg (this article is actually quite scary): - Spanish banks are masking their full exposure to soured property loans while they continue to prop up insolvent “zombie” developers, leading to credit-rating downgrades and plummeting share prices.

Spain is trying to clean up its banks, requiring lenders to set aside more for possible losses on loans deemed performing to developers like Metrovacesa SA, which hasn’t completed a project in more than a year and has none under way. While that represents about 30 billion euros ($38 billion) of increased provisions, it’s not enough because many of the loans said to be performing aren’t, said Mikel Echavarren, chairman of Irea, a Madrid-based finance company specializing in real estate. ...

[Bloomberg is now finally touching on Ireland-style bailout for Spain discussed here back in April]

Markets in the US are still hoping for QE3, even though such a program may no longer be effective and may even end up doing more harm than good. The Eurozone is praying that the ECB will do another round of 3-year LTRO so that banks can buy more of their nations' sovereign debt. And Japan is in a permanent state of QE.

Global markets are now so addicted to government stimulus, it is often difficult to imagine stability without it. The question now is what would it take to break this dependence and is it even possible.